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Keys to the shop

PORTLAND, OR (BRAIN) — The time to pass the torch comes at a different point for every business leader. For some, it never comes at all. For Portland retailer Jay Graves, as he turned 50 he began thinking seriously about getting out.

“I figured I’d been in the business 35 years and I thought, ‘I can go to 55. That would be 40 years in the business.’

“So I told some of my managers at the time that that was my goal and that we would see what happens,” Graves said.

A few days after Thanksgiving, Graves announced he had sold his chain of stores, the Bike Gallery, to Mike Olson, who owns four stores in California and one in New Mexico.

Longtime Bike Gallery manager Kelly Aicher is a partner in the expanded operation.

Years before, the Bike Gallery had made a very successful transition from its founder, Bob Graves, to his son, Jay.

Bob opened the first Bike Gallery in 1974 and Jay began working there when he was 15.

For 23 years he worked alongside his dad, who kept his promise to retire at age 65 and sell the business to Jay. Graves bought the business over a period of a few years and Bob never meddled.

“I admire him greatly for sticking to his commitment to retire at 65. It’s not much fun to be 40 or 50 years old and say you work for your father,” he said.

Graves expanded the business after taking ownership, buying seven new locations, all of them in operation. Five of the locations are still running. And management opened a new store in Portland in December.

Options, options

Graves was young when he started in the business, and he had the luxury of retiring young while he had the energy and flexibility to make careful decisions about his exit strategy.

Many family-owned businesses fail because the founders neglect planning for a graceful departure—or for an unexpected one.

Family businesses most likely to fail are those in which the leaders, often the first generation or the entrepreneurs, wait until they are past normal retirement age to start planning, said Barbara Draper, director of the Center for Family Business at the University of New Hampshire.

“Once entrepreneurs are past their 70s or even into their 80s, it becomes almost impossible” to make a successful transition, Draper said.

“If [the leading generation] waits that long, they often don’t have anything else to do if they retire. And they are often very concerned about their financial security at that point. They may have been putting their profits back into the business instead of bankrolling their 401(k)s, and that can make for a real reluctance to let go.

“And, of course, the next generation wants to take the company in whatever direction they want, which requires spending money, which makes the first generation nervous,” Draper said.

Graves considered passing the Bike Gallery on to his children. As recently as five years ago two of his sons worked for him. But one left for another opportunity and the other, Simon, is still in his mid-20s.

“Until about three years ago I was thinking, of course it’s going to be my kids. Maybe they wouldn’t be 100 percent owners; maybe the management team would have some ownership.

“And then one of my kids left the business, so there was only one left, then the economy crashed and I thought, ‘You know, if I passed this along to my kid, I’m going to be tied to this business for the rest of my life. I don’t want that kind of responsibility, I don’t want that kind of stress. I don’t want to think about retail for the rest of my life.”

Landry’s: sustainability, not succession

On the other side of the country, the owners of Landry’s Bicycles in Boston have no plans to retire anytime soon. However, they are in the third year of, essentially, giving their store to its employees.

“I’m not going anywhere,” he said. “I call it a sustainability plan, although I know that term has other meanings,” said Henry, who opened the store with brother, Peter.

Landry’s has handed about 30 percent of the business’s equity over to employees, which includes Tom and Peter.

The partners chose to implement an ESOP because of its benefits, which include employee motivation, retention and tax deferral. The ESOP also forces the employees to manage more carefully, almost like a publicly traded business.

Planning and implementation of the ESOP and its related management succession plans meant that Landry’s was prepared when it was hit by a surprise this fall.

Just before Interbike, Peter’s wife, Joan, also a partner and employee in the business, became too ill to work and retired. And Peter has taken a leave of absence as he helps Joan in her battle with cancer.

Besides the emotional hit, the operation found itself suddenly with only a third of its longtime owners and managers. But Tom Henry said the ESOP and its related planning and employee training ensured the transition went smoothly.

“There were no questions about ownership succession; the employees just stepped up. It’s been stunning and excellent the way the company has moved forward. I’m incredibly proud of the company,” he said.

Henry said the ESOP process will get more complicated once employees own more than half the business. That is set to happen in two to three years, although the time frame is up to the Henrys to decide.

For example, when the employees own more than 50 percent of the trust that owns the company, there are stricter rules about who sits on the board of directors.

While Henry said the ESOP has instilled employees with an ownership attitude, he said it’s important to note that management succession is separate from ownership succession.

The employee-owners will only gain a vote to approve or disapprove a sale of the company. Otherwise, they are still employees who can be hired and fired and promoted as management decides.

Henry said ESOPs are one way to help rebuild the middle class in the U.S., something that has been a goal of his for decades.

“This feels good. This is part of what we should be doing in business. It just feels so right,” he said.

‘An exit strategy’

Austin, Texas, retailer Hill Abell is about two years into an ESOP at his business, Bicycle Sport Shop.

Like Henry, Abell said instituting an ESOP should not be mistaken for announcing a retirement. Abell plans to retire at 65, another 11 years from now.

“It is a retirement plan and it is an exit strategy, but it doesn’t mean I’m retiring right now,” he said.

Abell said the plan has gone over “exceptionally well” with his employees, and noted that for it to continue to have that effect, managers need to constantly mention the ESOP and keep employees informed.

“It’s made me and my management team develop better information tools for the staff. We’ve come up with a real basic financial [report] to share with the staff on a monthly basis, to help them understand the business.

“The real challenge is to constantly be talking about and thinking about it, and that responsibility falls to the management. Otherwise, it becomes like a 401(k) that everyone has but doesn’t think about. ESOP is a tool, and you have to keep it sharp.”

Ruling out an ESOP

Graves had considered an employee buyout at one point. “ESOP was always at the top of my list,” he said. “I had researched it for about five years.”

He had talked with the Henrys and Abell. “But both of them were planning on being around [involved in the businesses] for the next 10 years. I said, ‘No, I’ve been doing this for 38 years. I don’t want to be tied to retail. I’ve been doing this since I was 15; I want to try something else.’ ”

Besides the time commitment, the specter of lawsuits made Graves wary of an ESOP. One consultant told him to expect one or two lawsuits during an ESOP.

“This person said, ‘Someone is not going to like the valuation along the way; someone will attempt to sue you for various causes.’ That was staggering and sobering advice,” Graves said.

He next considered selling the store to a group of his managers, but found that some of them who had earlier expressed interest in buying the stores had changed their minds.

83 days and nights

That’s when an outright cash sale of the stores to an outsider started to make sense, and once Graves made that decision it moved quickly.

A year and a half ago Graves decided to get an evaluation of the company’s worth. He then hired an outside firm, Portland’s Meriwether Group, to facilitate a sale.

“I’d never done a purchase or a sale of this size before. All our expansion came from buying existing stores, but they were pretty simple purchases. So I hired an expert, Meriwether, to help with the process.

“We had a list of 10 or so dealers that we were going to contact [about buying the Bike Gallery]. Before that, I went to talk to folks at Trek. We’ve been business partners for more than 35 years, so I said I want to talk to them first.”

The idea of approaching Olson came after Graves’ conversation with Trek management. Olson, another longtime Trek dealer, licenses the Trek name for his Trek Bicycle Superstores.

Just 83 days after asking Olson if he was interested in buying Bike Gallery, they completed the sale.

Graves said the deal was good for him, for Trek, for Olson and—partly because of Aicher’s involvement—the Portland bike community.

“A lot happened in those 83 days. I admire Mike for all the work he put into it, and Kelly even more for stepping up and becoming an owner and a general manager partner, carrying on the legacy here,” Graves said.

Now that he’s out of retail, Graves said he expects to continue to support Cycle Oregon, a 2,000-rider tour. He also sits on the state parks and recreation commission, a governor-appointed position.

“I’m going to take some time to relax. I’m not going to return to bike retail, but I’m going to keep my eyes and ears open. I’m not going to be retiring to the islands,” he said.

“I would like to get in my truck and buy a trailer and drive around country hitting all the rail trails I’ve been hearing about all my life—and visiting colleagues I’ve known forever.”